1. (SBU) Summary. This is the first of two cables to
assist Washington, DC agencies in their Section 301
decision making for China. This cable focuses on non-
enforcement related IPR issues, including policy
developments, legislative developments and patent and
trademark prosecution. Post recommends that China remain
on the Priority Watch List (PWL) with Section 306
monitoring based on the data in this and subsequent cables.
IPR problems in China continue to outpace enforcement
improvements. There are increasing concerns over other
areas where the TRIPS Agreement and other bilateral
agreements offer little protection, such as exports of
counterfeit goods, Internet copyright issues, trade secret
protection, antitrust, and technology transfer. The
benefits of a WTO case should be weighed against any costs
in bilateral cooperation (e.g., through Mutual Legal
Assistance arrangements for internet issues), the delays in
obtaining a final decision and compliance, and the
likelihood any decision might be superseded by other
problems. Post also continues to encourage and support
stronger interagency coordination as well as coordination
with other concerned trading partners, such as the EC,
Japan and Australia. End Summary.

2. (SBU) Industry generally reports that the enforcement
and protection of IPR is modestly improving in China, but
that it is still not at a sufficient level to deter
infringing activity. The improvements, though small enough
to be within a margin of error, are also consistently
revealed across different sectors.

-- In its 2006 White Paper, AmCham in Beijing advised that

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of 83 companies polled, 55 percent believed that IPR
enforcement had stayed the same in 2005, while seven
percent believed that it had deteriorated and 37 percent
said ithad improved. Of 76 companies polled, 54 percent
said the level of counterfeiting had stayed the same, seven
percent said it had decreased, and 44 percent said it had
increased.

-- In its 2007 Section 301 Report, The International
Intellectual Property Alliance showed static piracy levels
of 85 percent for records and music with an increase in
damages from 204 to 206 million USD. Motion picture piracy
levels had similarly decreased by two percent from 2004 to
2005 from 95 percent to 93 percent. Numbers for 2006 were
not available. The problem of keeping pace with ChinaQs
technological growth is also evident in the statistics
presented by the Business Software Alliance, which showed a
drop in piracy levels from 86 percent to 84 percent from
2005 to 2006, while at the same time alleging that losses
increased from USD 1,554 million to USD 2,949 million.

-- In its Section 301 submission, the International
Anticounterfeiting Coalition (IACC) reports that their
membersQ concerns about IPR enforcement in China remain
Qby-and-large unchangedQ since 2006.

--In a recent survey commissioned by the Business Alliance
To Stop Counterfeiting and Piracy, China was reported as
the least favorable IPR environment, among 53 countries,
with a weighted ranking of 3.49, against the next highest
country, Russia of 2.25. China was rated the most
unfavorable country for IPR 37 times. Russian was rated
the least favorable only 29 times.

-- A survey in 2006 of members of the China-based
multinational Quality Brands Protection Committee (QBPC)
revealed that 30 percent of reporting members believed that
the counterfeiting/piracy situation had worsened in 2006,
with the majority of respondents describing the worsening
as QmoderateQ to QsignificantQ. By contrast, 28 percent
reported that the problem had improved during 2006, with
most characterizing the improvement as QslightQ to
QmoderateQ. Forty percent of the members believed that the
state of counterfeiting and piracy had remained the same in
2006 compared to 2005.

-- QBPC Members also reported that the proportion of the
market occupied by counterfeit goods in 2006 was about the
same as in previous years. Among respondents,
approximately 41 percent reported that at least 11 percent

BEIJING 00002101 003 OF 016

of their products in the market were fake (19 percent
reported 11 to 25 percent; nine percent reported 26 to 50
percent, and 13 percent reported over 50 percent). The
remaining 60 percent of members reported that fakes
occupied 10 percent or less of the market for their branded
goods. Estimates of lost revenue due to IP violations in
China in 2005 decreased slightly compared to 2004. Among
reporting members, 88 percent advised that their lost
revenue due to IP violations in 2005 was 15 percent or
less, compared with 79 percent in 2004. However, 10
percent of members estimated revenue losses in excess of 20
percent. (QBPC Annual Membership Survey - 2006).

3. (SBU) Overall, industry is not optimistic about the
future. QBPC membersQ opinions were roughly split on the
Chinese governmentQs commitments to addressing
counterfeiting/piracy, with 44 percent assessing the
government's commitment as QexcellentQ, "good" or
"satisfactory" while 44 percent rated it as "fair". Local
protectionism continued to be a major concern for members,
with over 75 percent wanting to see greater efforts made in
this area.

4. (SBU) In his February 15, 2007 testimony before the
House Ways and Means Committee, Dan Glickman of MPAA stated
that 61 percent of motion picture industry respondents
surveyed said they believe movie piracy will continue to
increase, while 39 percent said they believe piracy levels
will hold steady. No one interviewed believed that the
market for pirated films will shrink. (Statement of Dan
Glickman, Chairman and Chief Executive Officer Motion
Picture Association of America, Before the Subcommittee on
Trade Committee on Ways and Means QThe US-China Trade
AgendaQ, February 15, 2007. ) (Note: The Mission also
hosted a seminar on the future of copyright protection and
market access on March 26 and hopes to report further on
the prognosis for the copyright industries in 2007 and the
next several years. End Note.)

5. (SBU) Chinese research organizations also conduct
periodic surveys on counterfeiting and piracy. For
example, the Sample Investigation Report on Reading and
Buying Inclinations of People Across China (2006) (Chinese
Institute of Publishing Science) showed little change from
2001 - 2005 in people's attitudes towards buying pirated
publications. Between 2003 and 2005, respondentsQ

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inclination to purchase pirated AV products rose from 77.7
percent to 83.3 percent, compared to drops in other
categories. Common publications dropped from 33.3 to 22.1
percent; textbooks dropped from 13.2 to 9.5 percent; and
software dropped from 12.4 to 10.3 percent.

6. (SBU) In 2006, China Labs released a study on software
piracy which indicated that the general piracy rate of
computer software is 66 percent, in which, system software
is the highest, reaching 75 percent and industry
applications is the lowest, 31 percent. The software that
is pirated most seriously is: office software (84 percent)
and operating system (81 percent). Measured by market
value, pirated software was worth about 140 billion Yuan,
in which system software accounts for 47 percent,
applications 43 percent and supporting software 10 percent.
The piracy rate is 57 percent based on computer software
sales, 40 percent based on the sales of software products
(including embedded software) and 26 percent based on the
sales of the whole software industry (including software
service and integration, and software exports).

SIPDIS
of Commerce Bo Xilai participated in the Roundtable, which
drew about 250 industry representatives. Secretary
Gutierrez cited three areas to improve IP enforcement: (1)
lowering criminal thresholds, (2) offering greater market
access for audio-visual products, and (3) better
enforcement, particularly in cracking down on criminal
organizations. Minister Bo Xilai said that China's battle
against IPR infringement has stepped up, including opening
50 IPR complaint centers that have received over 15,000
inquiries. The China Trademark Office said that the
Trademark Law will simplify and shorten the trademark
examination period, limit opposition filings to cut down on
abuses, and specify different types of infringement.

8. (SBU) Industry representatives at the Roundtable
unanimously emphasized market access and law enforcement as
the most fundamental problems facing industries doing
business in China. Industry members specifically called
for: (1) increasing manpower and budget to deter copyright
infringement; (2) fostering access to China's government-

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controlled movie business and stronger IPR enforcement in
the film business; (3) promoting legislative reform,
transparency, and public awareness initiatives to protect
trademarks in China; (4) addressing the Internet
distribution of counterfeit medicines; (5) implementing
more rapidly software legalization requirements for State
Owned Enterprises; and (6) improving market access for game
software.

9. (SBU) IPR concerns are also increasingly migrating to
higher technology areas with greater stakes for U.S.
research and development interests, in line with ChinaQs
increasing focus on Qself-reliant innovation.Q Among the
40 respondents to an ANSI survey on policy concerns in
China, 78 percent expressed concern about ChinaQs IP and
standardization policies, while 56 percent were Qvery
concernedQ or considered it their Qhighest priority.Q
PhRMAQs members estimate their damages at 34 percent of
sales, the highest in percentage and absolute terms of any
country reported.

-------------------
The Internet Threat
-------------------

10. (SBU) Although there were positive developments this
year in Internet IPR related legislation and enforcement,
ChinaQs rapid growth in Internet usage, coupled with
persistently weak IPR enforcement, has caused many rights
holders, particularly in copyright and brand sectors, to be
concerned. These issues were also identified in the
AmbassadorQs IPR Roundtable which focused on Internet-
related IPR issues.

11. (SBU) With approximately 140 million Internet users,
China ranks second in the world. China also has 843,000
websites and the number of Q.CNQ domain names increased by
64.4 percent over 2005 to 1.8 million. Broadband users
increased to 90.7 million, to about two thirds of ChinaQs
internet users. In one survey by ChinaQs Press and
Publications Journal, net users selected the Internet as
their major means for getting information (85 percent).
Seventeen million Internet users use their mobile phone to
access the Internet, while 72 percent use the internet and
send and receive email. By 2008, China will have the most
Internet users in the world.

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12. (SBU) The Internet environment is creating both
challenges for enforcement and market opportunities.
Changes in the entertainment software sector have been
dramatic. In 2006, the market value of Chinese-created
Internet games was 4.24 billion RMB, 64.5 percent of the
total internet game market value. It increased 87.4
percent compared to 2005. The market value of mobile phone
games was 1.48 billion RMB, a 50.2 percent increase over
the previous year. The market for personal computer (PC)
games in 2006 was almost unchanged. The sales income was
only 65 million RMB. (Data is prepared by the Electronic &
Internet Phonograms Publishing Department of NCAC,
Committee of China Game Industry and IDC IntQl Data Corp.).
Similar growth is expected in the Qnetwork musicQ market,
which was worth 2.78 billion RMB in 2005 and is expected to
grow by 50% in 2006.

13. (SBU) The challenges of IPR protection in ChinaQs
internet environment are not limited to copyright. In its
annual survey, the Quality Brands Protection Committee
noted that the sale of counterfeit goods via the Internet
is now a key area of concern for members, with 74 percent
characterizing the problem as either QveryQ (30 percent) or
QsomewhatQ (44 percent) serious. IACC in its Section 301
report tabulated the number of hits for certain brands on
one of ChinaQs major B2B sites, taobao.com: 737,000 hits
for Nike, 452,000 for Adidas, 171,000 for Puma, and 109,000
for Abercrombie and Fitch, among other brands. Among non-
fashion brands, there were 6,100 hits each for Zippo and
Cisco. Of course, not all of these hits may be for
counterfeits, but the large numbers suggest many
counterfeit vendors.

14. (SBU) (Note: Because investigations into parties
offering counterfeits and pirates over the Internet is
time-consuming and rarely achieves the goal of identifying
the vendor, these cases require the active support of local
authorities, especially the police and prosecutors. End
Note.)

15. (SBU) ChinaQs limited enforcement over the Internet
raises Section 301 concerns. For the time being, however,
the Mission recommends pursuing Internet based cases with
China as both a trade and law enforcement priority under
Mutual Legal Assistance arrangements as well as through

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promoting ChinaQs cooperation with third countries (such as
by accession to the Council of Europe Cybercrime
Convention), in order to make further inroads into this
important area. If China is unwilling to cooperate in
pursuing cases, this failure should be raised through
higher level channels, such as the JCCT or perhaps the
Strategic Economic Dialogue.

16. (SBU) In 2006, China drafted a range of new laws and
regulations. In addition, several important macro-level
IPR-related policy documents were under consideration: (a)
the National IPR Strategy, which is scheduled to be
promulgated in mid-2007; (b) the 11th Five Year Plan
(2006), which establishes a national goal of Qself reliant
innovationQ; and (c) the 15 year Science and Technology
Plan. The first two documents were reported in last yearQs
301 cable and other reports. While ChinaQs goal of
becoming an innovative society is laudable, U.S. industries
have increasingly expressed concern that these policy
documents appear to support antitrust measures, patent
abuse and patent misuse doctrines, standards policy, all of
which could weaken the value of U.S. rights holders. These
concerns arise from the above-mentioned policy documents
and other related national and local documents, such as the
National Standards Strategy, Famous Brands Strategy, as
well as proposals for developing ChinaQs cultural markets
and industries.

17. (SBU) The new laws and regulations are ChinaQs most
significant legislative drafting effort in IPR since
joining the WTO in 2001. In 2006, SIPO posted the draft of
the third revision of ChinaQs Patent Law on its website and
solicited public comments. A SIPO delegation visited the
United States to discuss the draft. The State Council
Legislative Affairs Office (SCLAO) is reviewing the draft,
which could be adopted as early as 2008. Also in 2006, the
Chinese Trademark Office initiated an effort to revise the
Trademark Law. The draft was also placed on the CTMO
website for public comment. We understand that another
draft may be made available before the CTMO draft is
transmitted to the SCLAO for its review and retransmission
to the National PeopleQs Congress (NPC). For the third
straight year, the State Administration for Industry and
Commerce has als been preparing revisions to the Law to
Counter Unfair Competition. This draft may also be
submitted to the SCLAO for its review in 2007. The draft

BEIJING 00002101 008 OF 016

would likely include consideration of trade secret law
reform - an issue that has been raised at both the SED and
in discussions regarding cooperation in commercial law
reform under the JCCT Commercial Law Working Group. The
General Administration of Press and Publications has also
advised that early stage research may also be underway by
copyright-related ministries on copyright law reform.

18. (SBU) In 2007 the SCLAO is scheduled to adopt a new
regulation on patent agents, the SAIC is also considering
rules to handle the abusive registration of trademarks. In
addition a new regulation on company name registration is
under consideration which could also address abusive
registration of company names. An initial effort has
already been undertaken in this regard on registration of
trademarks by natural persons.

19. (SBU) In 2006 the State Council adopted the Regulations
on the Right of Communication to the Public. In December
2006, the NPC completed its first reading of the WIPO
Copyright Treaty and WIPO Performances and Phonograms
Treaty with a view towards accession in 2007. ChinaQs
accession to the WIPO Treaties was part of its JCCT
Commitments and appear on track, albeit with some delay.

21. (SBU) There are several research projects underway that
could assist in legislative reform. The Mission is aware
of several efforts to consider revising aspects of the
Criminal Code. The Supreme PeopleQs Court, criminal
division, is also researching changes to ChinaQs criminal
counterfeit pharmaceutical law and related judicial
interpretations.

22. (SBU) The Mission is unable to thoroughly review all
local laws and regulations. MOFCOM has collected many
local laws and regulations at the ChinaQs national IPR
website (http: double backslash www.ipr.gov.cn).

23. (SBU) ChinaQs Trademark Office (CTMO) remains the
worldQs busiest. According to preliminary data, the CTMO
received over 700,000 trademark applications in 2006.

BEIJING 00002101 009 OF 016

Also, the CTMO registered 260,000 trademarks in 2006, for a
total of 2,760,000 registered trademarks. If 2006 data
consistent with prior years, one can infer that
approximately one tenth of these applications were from
foreigners. Chinese companies are also increasingly going
global in their trademark applications. According to the
World Intellectual Property Organization, China's
international trademark applications occupied 8th place
overall, with 1,328 of 36,471 applications or 3.6%.

24. (SBU) Because of backlogs and appeals, it can take 10
years to fully adjudicate a contested trademark case
through opposition, cancellation and appeal proceedings.
These delays make it especially difficult to challenge
abusive registrations in a timely fashion by companies.
Many companies who seek to QsquatQ on another companyQs
trademark or corporate identity are resorting to new
abusive tactics, such as setting up overseas shell
companies or domestic corporations with similar sounding
names, entering into false license agreements and even
creating counterfeit operational corporations. The
narrower issue of abusive trademark registrations and
company name registrations has increasingly caught the
attention of Chinese agencies. A key step to address those
problems would be to increase resources to the trademark
agencies to improve the efficiency and quality of trademark
registrations, oppositions, cancellations, and appeals.

25. (SBU) ChinaQs system for geographical indications
(GIQs) is similar to the U.S. in its use of certification
and collective marks. USG enjoys good cooperation with the
Chinese Trademark Office in exchanging views on using
trademarks to protect GIQs, and in promoting the use of the
TM-based GI system to Chinese and U.S. industry.

26. (SBU) ChinaQs Patent Office, the State Intellectual
Property Office, has responded more quickly to the
increasing emand on its services and has experienced
remarkable growth. In 2006, Chinese inventors filed
122,318 invention patents and were granted 25,077.
Foreigners filed 88,172 invention patent applications and
were granted 32,709 patents. Chinese utility model
applications totaled 159,997 of which 106,312 were granted.
There were only 1,369 foreign utility model patents applied
for, and 1,343 were granted. Chinese inventors filed for
188,027 design patents and 92,471 design patents were
granted. There were 13,295 design patents applied for by
foreigners and 10,090 were granted. (Source:
http: double back slash www.sipo.gov.cn). Also of note,
of 145,300 international patents filed through the Patent

BEIJING 00002101 010 OF 016

Cooperation
Treaty in 2006, ChinaQs filings increased 56.8 percent to
3,910, allowing it overtake Switzerland and Sweden to reach
eighth place in 2006. Huawei Technologies was the 13th
largest world-wide corporate filer. Overall, ChinaQs top
three patented technologies were in natural products and
polymers, digital computers, and telephone and data
transmission industries.

27. (SBU) The rapid increase in IP filings suggests that
Chinese companies have now begun to invest in ChinaQs IP
system. However, Chinese companies are generally not
filing commercially valuable patents. Design patents in
particular are not subjected to substantive examination,
and have been asserted for abusive purposes against
foreigners, including U.S. companies. There is currently
no penalty associated with the willful filing of patents on
anotherQs invention, or with the failure to disclose
relevant prior art upon which the patent is based. The
nearly 100 to 1 ratio of Chinese applications for utility
model patents, and 10/1 for design patents to foreign
applications, and the higher QgrantQ rate of foreign
invention patents, statistically demonstrates the
challenges China faces in its efforts to become a more
innovative economy, and the continuing paucity of high
quality patents. Overall currently valid foreign-owned
invention patents with continuing validity are more than
two times the number of Chinese-owned invention patents. We
are especially concerned that current efforts to stimulate
QinnovationQ by mandating that Chinese companies file more
patents could further put pressure on Chinese agencies to
subsidize, reward, grant and enforce patents that are not
innovative or commercially viable. (QAn Analysis of the
Situation Regarding Patents Currently in Effect in China,Q
China Intellectual Property News, March 14, 2007 at 5).

28. (SBU) The TRIPS Agreement obliges member countries to
provide an opportunity for a judicial authority to review
final administrative decisions. Currently appeals of final
patent and trademark office decisions are made to the
Beijing Intermediate Court. Discussions with the Beijing
High Court suggest a reversal rate by the civil division of
the court of final decisions of the State Intellectual
Property Office on the order of 30 percent, while the
Administrative Division of the Court reverses decisions of
the Patent office at a much lower rate (closer to 10
percent). These reversal rates, if true, may be a welcome
sign of increasing independence of the courts in
considering the validity of administrative decisions. An
example of such reversals that was welcomed by U.S.

BEIJING 00002101 011 OF 016

industry was the June 2, 2006 decision by the Beijing
Number One Intermediate Court to reverse the Patent
Reexamination Board in PfizerQs Viagra patent dispute.

29. (SBU) The Mission, in conjunction with other USG
agencies, is actively encouraging reform of the patent and
trademark systems to support legislative reform, improved
transparency and clarity in examination guidelines, better
management of the patent and trademark offices, higher
quality examinations, and a reduction in abusive practices
that harm foreigners and Chinese alike. Post is working
with these agencies to improve judicial review of final
office decisions.

------------
Transparency
------------

30. (SBU) Chinese agencies, including the courts, have
increasingly made IPR-related laws, regulations, and rules
available, typically over the Internet. Increasingly,
rights holders can use the Internet to file complaints, or
apply for patents or trademarks or Customs recordal. The
Mission, in conjunction with USG agencies, has been pleased
to support these continuing efforts. Notable efforts have
been made by the CTMO (a searchable trademark database) and
MOFCOMQs Electronics Business Center (which sponsors the
site www.ipr.gov.cn), as well as the Supreme PeopleQs
Court. These efforts have apparently brought concrete
improvements to our rights holders. Both the CTMO and
MOFCOM have also reported to the USG that U.S.-based IP
addresses are among the most frequent users of these
electronic information services.

30. (SBU) The Mission also supports efforts to provide
English language complaint forms, English language case
referral advisors, and English language templates for
complaints for IPR-related searching on the Internet.
These English language resources can be especially helpful
to small and medium enterprises that may not have Chinese
speaking staff or a presence in China. We have been
pleased to see these developments underway in China and to
support their presence throughout the Embassy and consular
districts.

31. (SBU) Many rights holding organizations have also
applauded the increasing transparency of Chinese agencies
in drafting and promulgating new laws, regulations and
rules. During 2006, the Mission was pleased to provide a
forum for industry to discuss the proposed rules on

BEIJING 00002101 012 OF 016

copyright protection over information networks, as well as
to support discussions in Washington and Beijing on
proposed revisions to the Patent and Trademark Laws. We
have worked with USPTO to help the Chinese Trademark Office
better understand trademark examination rules. We look
forward to supporting other laws that may be in the earlier
stages of drafting, including the Law to Counter Unfair
Competition, the revised implementing rules to the Patent
Law, and a revised copyright law. Chinese ministries have
also increasingly expressed an interest in sharing
experience at an early stage in consideration of new laws.
We have also supported providing comments to the Supreme
PeopleQs Court on proposed new Judicial Interpretations.

32. (SBU) There have, however, been shortcomings in these
efforts towards transparency. The most notable of these
include administrative agencies that refuse to issue
penalty decisions to rights holders and judges who
frequently meet with litigants in private. Considerable
anecdotal evidence exists for ex-parte communication on
pending cases that might be considered inappropriate in the
U.S. context. In addition, Chinese agencies have generally
been reluctant to actively share drafts of policies and
judicial interpretations involving criminal IPR matters,
the most notable example of which was the 2004 criminal
judicial interpretation. Finally, ChinaQs response to the
Article 63 transparency request at the WTO was
disappointing.

33. (SBU) Industry remains highly concerned over
intellectual property and standards policies in China. As
indicated, a recent survey of members of the American
National Standards Institute (ANSI) listed IPR and
standardization policies third among all overarching policy
concerns in China as a "highest priority" area - behind
certification and testing requirements, and transparency.
It remains to be seen how pending legislation in China will
treat intellectual property in standardization,
particularly possible compulsory licensing of patents. The
Standardization Law is currently being debated in the State
Council and is the source of much contention, according to
a Standardization Administration of China official.
Moreover, as detailed in USTRQs 2006 WTO Compliance Report
and elsewhere, notwithstanding ChinaQs commitment at the
April 2004 JCCT meeting and elsewhere to technology
neutrality on licensing issues, industry complains about

BEIJING 00002101 013 OF 016

Chinese interference in licensing discussions. As one
industry association stated in the context of the 2006
hearings: QTechnology mandates or promotion of unique
national standards are some of the ways China seeks to
foster the domestic development of innovative technologies
and [intellectual property rights]. This policy is also
implemented through direct or indirect interference by
Chinese authorities in licensing negotiations between
Chinese and foreign technology companies.Q

34. (SBU) In September 2006, the NPC conducted its first
reading of the draft Anti-Monopoly Law, legislation which
has been in the works for nearly 20 years. On February 27,
in its 2007 legislative plan, the NPC committed to
scheduling second and third readings of the draft anti-
monopoly law this year." There remain significant risks
that overly aggressive use of antimonopoly law could impede
the legitimate and fair protection and licensing of IP
rights in China. For example, some agencies, including
those tasked with protecting intellectual property rights,
have also held that an intellectual property holderQs
refusal to negotiate a license is an abuse of its Qmonopoly
power.Q Although Microsoft and Intel in particular are
frequently castigated in the government-run press, the
greatest impediment to competition in certain industrial
sectors, such as business software and Internet music
delivery, may in fact be pirates and infringers. The
Mission appreciates the continued active support of USDOJ,
USFTC and other agencies on the implications of ChinaQs
Antimonopoly Law on intellectual property rights protection
and enforcement in China and in promoting the guarantee of
intellectual property rights as a critical incentive to
fostering investment and innovation, which promote a
competitive economy. Post believes that the overall
message that patents and IPR are generally Qpro-
competitionQ has been delivered extremely well,
notwithstanding defects of current law and policy in China
and possible risks for the future.

35. (SBU) However, post notes that the FTC/DOJ hearings and
2003 FTC report on intellectual property and competition
policy continue
to be cited back to USG and others to justify a range of
Chinese policies that may be considered anti-IPR. For
example, the reportQs critical view towards business method
and software patents, and the need to improve patent
quality in those areas has been understood to be a
criticism of the U.S. having Qtoo liberalQ an attitude
towards granting patents. However, this criticism has
limited applicability to China, which has reportedly

BEIJING 00002101 014 OF 016

granted only three business method patents (probably by
mistake) and restricts granting software patents. Software
patents may be especially useful in China as some U.S.
companies such as IBM have advocated that high quality
software patents would also have significant value in
providing another enforcement channel to address rampant
end-user piracy. Concerns over poor quality of examination
of patents also have little relevance to the abusive
assertion of ChinaQs design patents, which are not examined
for substance and which are owned on a 10/1 ratio by
Chinese rights holders. Lack of deterrence of patent
infringement in China also makes many of the concerns of
the report completely irrelevant to China since the costs
of infringement in China are very low, with damages rarely
exceeding 500,000 RMB. Looking at patent examination
practice, Chinese applicants also suffer no consequences
for failing to reveal relevant prior art, or for asserting
claims that have a dubious legal basis against third
parties. A cleared position paper on the report that can
be used in discussions in China would be useful in
advancing the overall competitiveness and IPR agenda.

36. (SBU) The U.S. has recently committed with the EC to
look further at continuing technology transfer restrictions
in China. Apart from the IT sector, ChinaQs technology
transfer regime has, however, received relatively little
attention in recent years. As part of ChinaQs WTO
accession, WTO member states requested that the terms of
technology transfer in China Qshould be agreed between the
parties to the investment without government
interferenceQ(Working Party Report, Article 48). Upon WTO
accession, China issued new technology transfer regulations
(Dec. 10, 2001). In practice, China agreed to stop
requiring QregistrationQ of technology transfer contracts,
and only require QrecordalQ. However, registration may
still be necessary according to local practice or to obtain
any necessary licenses or approvals for a transaction, such
as remitting foreign currency. The U.S. Chamber and others
continue to urge USG to Qprohibit Chinese authorities from
directly or indirectly interfering in the negotiation of
technology transfer and royalty agreements between foreign
technology companies and their Chinese counterparts.Q (US
Chamber submission in advance of April 2006 JCCT).

37. (SBU) Apart from ChinaQs standards and antimonopoly
regime, there are also other restrictions in place that
affect the free transfer of intellectual property and may
need to be considered in fully evaluating ChinaQs
compliance with its bilateral and WTO commitments. These
include: local Chinese government interference in

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commercial negotiations and supervision of technology
transfer contracts through QregistrationQ rather than
QrecordalQ procedures; compulsory licensing and other
restrictive regulations in its patent regime; compulsory
licensing under ChinaQs software protection regulations and
copyright law for educational materials; mandatory grants
of improvements to Chinese licensees under the 2001
technology transfer regulations; current restrictions
over out-bound licensing of Chinese technology; scope of
confidentiality of clinical data, sample agricultural

SIPDIS
materials, feasibility studies, or other trade secret
information provided by rights holders to Chinese
regulatory agencies; the relationship between ChinaQs labor
law regarding non-compete agreements and protection of
trade secrets; and the scope of ChinaQs trade secret regime
as it applies to fundamental research.

--------------------------
What Does the Future Hold?
--------------------------

38. (SBU) As indicated above, industry generally senses
that the IPR environment in China has not improved
significantly in the past year. Although there have been
many notable efforts at improving protection, enforcement,
legislation and other areas, the results have been modest.
While there is no Qsilver bulletQ to resolving these
problems, thus far the Chinese government has resisted many
requests for improvements in its IPR system, including
increasing resources for criminal enforcement, copyright
enforcement and trademark examination; strengthening
administrative enforcement; taking more effective
structural measures to address local protectionism and
eyesores such as the Silk Street market in Beijing;
reducing or eliminating criminal thresholds; and
modernizing the criminal IPR law. These frustrations
undercut ChinaQs argument that it is doing all it can to
address IPR infringement issues. Consequently, the Mission
strongly supports ChinaQs 306 monitoring, and continued
placement on the PWL at this time, largely because China
has not effectively deterred the problems and not taken the
measures that need to be taken.

39. (SBU) The Mission also supports an appropriate WTO case
on IPR in the near future, as part of a coordinated
approach on IPR issues with China. These steps should also
include (a) continuing efforts for a negotiated resolution
of the case; (b) a focused request for China to identify
any and all criminal copyright cases it has undertaken
since WTO accession and requesting case-specific assistance

BEIJING 00002101 016 OF 016

on criminal cases; (c) a clear plan for public diplomacy
within China once the case is initiated; (d) coordination
with non-stakeholders in the case, including the software
sector, brand owners, and patent owners; (e) continuing to
seek common ground with other trading partners to support
the case; (f) continuing coordinated interagency engagement
on other issues of concern.

40. (SBU) In considering near term strategies, ChinaQs
threats to withhold or deny other forms of engagement on
IPR issues if the U.S. files a WTO case needs to be taken
seriously. Moreover, there is a significant risk that any
losses from initiating a case may be imposed on industries
other than those actively supporting a case. A WTO case,
if taken on criminal copyright thresholds, copyright market
access, or the availability of an effective copyright
remedy, would only address one aspect of the problem, even
for the copyright industries. Certain copyright
industries, such as business and entertainment software,
may not have their issues significantly addressed, while
consumer goods/trademarks and high tech IT industries may
be left out entirely. ChinaQs engagement on non-WTO
issues, such as control over exports of counterfeit goods,
Internet-copyright protection, cyber IPR crimes, antitrust
doctrine, and patent policy are occupying an increasingly
significant position in overall IPR engagement and need to
be considered as part of an overall strategy.

41. (SBU) Finally, it should be noted that certain U.S.
industries in China oppose a case, since they are either
not affected by IPR issues or believe that adequate
progress has been made and that a WTO case could impair the
relationships and progress made to date.

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